Occupational Licensing: A Barrier to Entrepreneurship

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About 29 percent of jobs require a government-issued license—a dramatic increase from just forty years ago when only 10 percent of workers were licensed. These licensure requirements result in fewer practitioners, who can demand higher wages, while also stifling new business creation and innovation.

High rates of new business creation are a sign of a dynamic economy in which the barriers to entrepreneurship are low. As entrepreneurs bring new ideas to market, they spur economic growth and create jobs. In fact, companies less than five years old are the primary source of net new job creation in the United States.

Yet, in certain fields and professions, the path to opening a new business is marked with barriers that can slow or even block entrepreneurs. These barriers often go unnoticed until the entrepreneur runs up against them. Such is the case with one form of government regulation known as licensing, which has the effect of fencing out new entrants while protecting the licensed from competition.

The Limiting Effects of Occupational Licensing

Licensing often is justified by claiming that services provided by licensed individuals are of higher quality than those that are not. However, an analysis of licensed interior designers in one state and certified interior designers in another found no difference in the number of consumer complaints registered.

Strict state licensing without a system of mutual recognition in other states restricts the ability of practitioners to move to markets where their skills would be more valuable. Licensing reciprocity ranges from none to full depending on the profession, with many states requiring some additional documentation, fees, and/or testing to obtain a license.

Occupational licensing requirements can be a hurdle to upward economic mobility. Research shows lower rates of entrepreneurship in states that license more low-income occupations.

Reconsider Licensing Policy to Spur Entrepreneurial Growth

State licensing boards are often composed primarily of licensed members of the occupation. Reform licensing boards to give greater representation to non-licensed practitioners.

Create public committees to evaluate licensing boards, provide independent analysis of newly proposed licensure requirements, and make recommendations to lawmakers.

Differences in state licensing requirements can make it difficult for entrepreneurs and workers to find opportunities and jobs, creating stale labor markets and underemployment. Mutual recognition of other state licenses would improve worker mobility and, thereby, boost economic dynamism.